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CPA Tcp

CPA Tcp Practice Test: Practice Test 9

Practice Test 9 for CPA Tcp: real questions and explanations from the Varsity Tutors practice-test pool.

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Question 1 of 25

In tax year 2023, Horizon Inc., a C corporation, has taxable income (before net operating loss deduction) of 500,000.Italsohasa2021netoperatinglosscarryforwardof500,000. It also has a 2021 net operating loss carryforward of 500,000.Italsohasa2021netoperatinglosscarryforwardof800,000. Horizon asks how much net operating loss it can use in 2023 and what remains. What is the correct application of net operating loss for this year?

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Question 1

In tax year 2023, Horizon Inc., a C corporation, has taxable income (before net operating loss deduction) of 500,000.Italsohasa2021netoperatinglosscarryforwardof500,000. It also has a 2021 net operating loss carryforward of 500,000.Italsohasa2021netoperatinglosscarryforwardof800,000. Horizon asks how much net operating loss it can use in 2023 and what remains. What is the correct application of net operating loss for this year?

  1. Use 500,000ofnetoperatinglosstoreducetaxableincometo500,000 of net operating loss to reduce taxable income to 500,000ofnetoperatinglosstoreducetaxableincometo0 and carry forward $300,000
  2. Use 400,000ofnetoperatingloss(80400,000 of net operating loss (80% of taxable income), leaving 400,000ofnetoperatingloss(80100,000 taxable income and carrying forward $400,000 (correct answer)
  3. Use 250,000ofnetoperatingloss(50250,000 of net operating loss (50% of taxable income), leaving 250,000ofnetoperatingloss(50250,000 taxable income and carrying forward $550,000
  4. No net operating loss is allowed because only net operating losses generated in the current year can be deducted

Explanation: This question tests the application of the 80% limitation for C corporations using post-2017 net operating losses. Horizon Inc. has 500,000oftaxableincomeandan500,000 of taxable income and an 500,000oftaxableincomeandan800,000 NOL carryforward from 2021, which is subject to the 80% limitation. The maximum NOL deduction is 400,000(80400,000 (80% × 400,000(80500,000), leaving 100,000oftaxableincomeanda100,000 of taxable income and a 100,000oftaxableincomeanda400,000 NOL carryforward. Answer A incorrectly allows the full $500,000 to reduce income to zero, Answer C incorrectly applies a 50% limitation, and Answer D incorrectly states only current-year NOLs are deductible. The key principle for tax planning is that C corporations must budget for at least 20% tax on pre-NOL income when relying on post-2017 NOL carryforwards.

Question 2

HH LLC is classified as a partnership. In Year 2, member H receives a 40,000cashdistributionandtheLLCreducesH’sshareofpartnershipliabilitiesby40,000 cash distribution and the LLC reduces H’s share of partnership liabilities by 40,000cashdistributionandtheLLCreducesH’sshareofpartnershipliabilitiesby15,000 in the same year; immediately before these changes, H’s outside basis is $45,000. Under Internal Revenue Code sections 731 and 752, what is the correct characterization of the net effect for determining whether H recognizes gain?

  1. Only the cash distribution is considered; liability decreases are ignored for gain recognition.
  2. H is treated as receiving 55,000ofdeemeddistribution(55,000 of deemed distribution (55,000ofdeemeddistribution(40,000 cash plus $15,000 liability relief) for section 731 purposes. (correct answer)
  3. H is treated as receiving only $25,000 because liabilities offset cash distributions dollar-for-dollar.
  4. H is treated as receiving $40,000 dividend income and no basis adjustment is required.

Explanation: This question tests the combined effect of cash distributions and liability changes under IRC Sections 731 and 752, treating liability decreases as money distributions. The key facts are H's 40,000cashand40,000 cash and 40,000cashand15,000 liability reduction, with 45,000pre−basis.ChoiceBiscorrectasthenetdeemeddistributionis45,000 pre-basis. Choice B is correct as the net deemed distribution is 45,000pre−basis.ChoiceBiscorrectasthenetdeemeddistributionis55,000 for gain purposes, consistent with Section 752(b). Choice A is incorrect as liability changes are included; choice C is wrong on offsetting; choice D is incorrect since distributions are not dividends. A transferable framework for evaluating LLC tax treatment aggregates cash and liability shifts, tests for gain if exceeding basis, and adjusts basis accordingly.

Question 3

In 2025, Amir Johnson (married filing jointly) has 5,000netshort−termcapitalgainand5,000 net short-term capital gain and 5,000netshort−termcapitalgainand2,000 net long-term capital loss. He also has a $4,000 capital loss carryforward from 2024 that is long-term. What is the taxpayer's net capital gain (or loss) for 2025 after applying carryforward and netting rules?

  1. Net capital gain of $3,000 short-term.
  2. Net capital loss of 1,000;deductible1,000; deductible 1,000;deductible1,000 in 2025. (correct answer)
  3. Net capital gain of $5,000 short-term because carryforwards cannot be used in years with capital gains.
  4. Net capital loss of 6,000;deductible6,000; deductible 6,000;deductible3,000 with a $3,000 carryforward.

Explanation: This question tests the application of capital loss carryforwards in the netting process. Amir first applies his 4,000long−termcapitallosscarryforward,whichcombineswithhiscurrentyear4,000 long-term capital loss carryforward, which combines with his current year 4,000long−termcapitallosscarryforward,whichcombineswithhiscurrentyear2,000 long-term loss for a total of 6,000inlong−termlosses.Thisnetsagainsthis6,000 in long-term losses. This nets against his 6,000inlong−termlosses.Thisnetsagainsthis5,000 short-term gain, resulting in a net capital loss of 1,000,whichisfullydeductiblein2025.OptionAincorrectlyignoresthecarryforward.OptionCincorrectlyprohibitsusingcarryforwardswhencurrentyeargainsexist.OptionDincorrectlycalculatesa1,000, which is fully deductible in 2025. Option A incorrectly ignores the carryforward. Option C incorrectly prohibits using carryforwards when current year gains exist. Option D incorrectly calculates a 1,000,whichisfullydeductiblein2025.OptionAincorrectlyignoresthecarryforward.OptionCincorrectlyprohibitsusingcarryforwardswhencurrentyeargainsexist.OptionDincorrectlycalculatesa6,000 net loss. Capital loss carryforwards retain their character and are applied first in the netting process, potentially offsetting current year gains before the annual $3,000 limitation applies.

Question 4

A business owner who wants to provide significant retirement plan contributions should consider which entity structure?

  1. Sole proprietorship - sole proprietors cannot establish retirement plans.
  2. S corporation - S corps have lower retirement plan contribution limits.
  3. C corporation - C corps provide the largest retirement plan contributions.
  4. Any entity structure can establish retirement plans (SEP-IRA, SIMPLE IRA, 401(k), defined benefit) - the key is net earned income or compensation, not entity type. (correct answer)

Explanation: Retirement plan options are available across all entity structures. The contribution limits depend on compensation, not entity type. Answer D is correct.

Question 5

An individual taxpayer has a projected taxable estate of 13,900,000andnopriortaxablegifts.Assumethelifetimeexemptionis13,900,000 and no prior taxable gifts. Assume the lifetime exemption is 13,900,000andnopriortaxablegifts.Assumethelifetimeexemptionis13,610,000, the estate tax rate is 40% above the exemption, and the annual gift exclusion is $19,000 per donee. The taxpayer wants to reduce the taxable estate below the exemption as efficiently as possible. Which strategy best minimizes estate tax liability?

  1. Make a completed gift of at least $290,000 (using annual exclusions and/or lifetime exemption) so that the taxable estate is reduced below the lifetime exemption. (correct answer)
  2. Transfer $290,000 to a revocable trust to remove it from the taxable estate while retaining the ability to revoke the trust.
  3. Do nothing because estates under 15,000,000arenotsubjecttofederalestatetaxwhentheexemptionis15,000,000 are not subject to federal estate tax when the exemption is 15,000,000arenotsubjecttofederalestatetaxwhentheexemptionis13,610,000.
  4. Pay estate tax now at 40% on $290,000 to lock in the rate and reduce future estate tax exposure.

Explanation: This question tests minimal gifting to bring an estate under the exemption threshold under IRC Section 2010. The key facts are a 13,900,000estateexceedingthe13,900,000 estate exceeding the 13,900,000estateexceedingthe13,610,000 exemption by 290,000,andnopriorgifts.ChoiceAiscorrectbecauseacompletedgiftof290,000, and no prior gifts. Choice A is correct because a completed gift of 290,000,andnopriorgifts.ChoiceAiscorrectbecauseacompletedgiftof290,000 (using exclusions or exemption) reduces the estate below the threshold, eliminating tax per unified credit rules. Choice B is incorrect as revocable trusts are includible under IRC Section 2038; choice C is wrong as tax applies above $13,610,000. Choice D fails as estate tax is paid after death, not prepaid. A transferable framework is to gift the exact excess over exemption to minimize transfers. Use annual exclusions first for the gift to preserve full exemption for estate purposes.

Question 6

Wyatt and Aria are married filing jointly with AGI of 100,000.Theypaid100,000. They paid 100,000.Theypaid7,800 of unreimbursed medical expenses (deductible only above  7.5%\,7.5\%7.5% of AGI), 10,500ofstateandlocaltaxes(subjecttothe10,500 of state and local taxes (subject to the 10,500ofstateandlocaltaxes(subjecttothe10,000 cap), 6,400ofqualifiedhomemortgageinterest,and6,400 of qualified home mortgage interest, and 6,400ofqualifiedhomemortgageinterest,and2,600 of cash charitable contributions. What is the total allowable itemized deduction for Wyatt and Aria (ignoring any other limitations)?

  1. $21,300
  2. $19,300 (correct answer)
  3. $20,800
  4. $18,550

Explanation: This question tests itemized deductions for married filing jointly with medical expense floor and SALT cap. The key facts are: medical expenses of 7,800mustexceed7.57,800 must exceed 7.5% of AGI (7,800mustexceed7.5100,000 × 7.5% = 7,500),resultingin7,500), resulting in 7,500),resultingin300 being deductible; SALT of 10,500islimitedto10,500 is limited to 10,500islimitedto10,000; mortgage interest of 6,400isfullydeductible;andcharitablecontributionsof6,400 is fully deductible; and charitable contributions of 6,400isfullydeductible;andcharitablecontributionsof2,600 are fully deductible. The total itemized deduction is 300+300 + 300+10,000 + 6,400+6,400 + 6,400+2,600 = 19,300.ChoiceBcorrectlyshows19,300. Choice B correctly shows 19,300.ChoiceBcorrectlyshows19,300, Choice A (21,300)overstatesthededuction,ChoiceC(21,300) overstates the deduction, Choice C (21,300)overstatesthededuction,ChoiceC(20,800) has calculation errors, and Choice D ($18,550) appears to exclude the medical deduction. For tax planning, married couples should coordinate deductible expenses and consider whether bunching strategies could help them exceed the standard deduction in alternating years.

Question 7

A single individual under age 65 in 2024 must file a federal income tax return if their gross income equals or exceeds:

  1. $10,000.
  2. $12,000.
  3. $14,600 - the standard deduction for single filers in 2024, which equals the gross income filing threshold. (correct answer)
  4. $20,000.

Explanation: Single filers under 65 must file when gross income equals or exceeds the standard deduction (14,600in2024).AnswerCiscorrect.14,600 in 2024). Answer C is correct. 14,600in2024).AnswerCiscorrect.10,000 (A) and 12,000(B)arebelowthe2024threshold.12,000 (B) are below the 2024 threshold. 12,000(B)arebelowthe2024threshold.20,000 (D) exceeds the threshold.

Question 8

A Section 338(h)(10) election in a stock acquisition allows:

  1. The target corporation to recognize no gain or loss on the deemed sale of its assets.
  2. The acquirer to purchase stock while treating the transaction as an asset purchase for state law purposes only.
  3. The acquirer to treat the stock purchase as an asset purchase for tax purposes - the target is treated as having sold all its assets at FMV and immediately reconstituted, giving the acquirer a stepped-up basis in the target's assets while the transaction is still a stock deal for legal purposes. (correct answer)
  4. The seller to avoid double taxation on the deemed asset sale.

Explanation: Section 338(h)(10) (available for qualified stock purchases from S corps or when both parties consent) treats the transaction as an asset purchase for tax, giving the buyer a stepped-up basis while the transaction remains a stock purchase for legal purposes. Answer C is correct. The target recognizes gain on the deemed sale (A). It applies to federal tax purposes (B). The seller typically bears the tax cost of the deemed asset sale (D).

Question 9

During an office examination, a CPA is representing a client. The IRS examiner proposes an adjustment based on a misinterpretation of a complex regulation. The CPA has prepared a memo citing a relevant court case and a Treasury Regulation that contradict the examiner's position. The examiner, however, remains unwilling to concede the issue.

What is the CPA's most appropriate professional action at this point in the examination process?

  1. Advise the client to concede the issue to maintain a good relationship with the examiner and avoid further dispute.
  2. Contact the examiner's group manager to file a formal complaint about the examiner's lack of cooperation.
  3. Politely disagree, document the client's position with the contrary authority, and state the intent to go to Appeals if necessary. (correct answer)
  4. Immediately end the meeting and advise the client to file a petition with the U.S. Tax Court to bypass the examiner.

Explanation: When you encounter questions about CPA conduct during IRS examinations, focus on the professional standards requiring competent representation while following proper procedural channels. The most appropriate action is to politely disagree, document the client's position with contrary authority, and state the intent to go to Appeals if necessary (C). This approach demonstrates professional competence by standing firm on well-researched legal positions while respecting the examination process. The CPA has done the necessary research, found contradictory authority, and should advocate for the client's correct position. When an examiner won't concede despite clear contrary authority, the natural next step is the Appeals process, which is specifically designed to resolve such disputes. Choice A is wrong because advising the client to concede a legally incorrect position violates the CPA's duty of competent representation. You should never recommend paying additional tax when you have solid authority supporting the client's position. Choice B is inappropriate because filing a complaint about the examiner's "lack of cooperation" is premature and unprofessional. Disagreeing with your interpretation isn't misconduct—it's part of the examination process. Choice D jumps too far ahead in the process. Tax Court is available only after receiving a Notice of Deficiency, and you must exhaust administrative remedies first. Going directly to litigation bypasses the Appeals process, which often resolves disputes more efficiently. Remember: In examination disputes, follow the proper sequence—examination, Appeals, then litigation if necessary. Document your position thoroughly and advocate professionally for your client's legally supportable positions.

Question 10

A CPA firm terminates its relationship with a client due to a fee dispute. The client paid a portion of the fee but still has a significant outstanding balance. The client sends a written request for the return of all records. The CPA's files contain source documents provided by the client (e.g., Form W-2s, 1099s), as well as the CPA's own analytical workpapers and a draft copy of the partially completed tax return.

According to Circular 230, which records must the CPA promptly return to the client, notwithstanding the fee dispute?

  1. Only the source documents provided to the CPA by the client. (correct answer)
  2. None of the records until the outstanding fee is paid in full, as permitted by state law.
  3. All records, including the CPA's own workpapers, as they were prepared for the client's benefit.
  4. The source documents and the draft copy of the tax return, but not the CPA's analytical workpapers.

Explanation: When you encounter questions about client records and fee disputes, you're dealing with Circular 230's specific provisions that balance CPAs' legitimate business interests with clients' fundamental rights to their own information. Under Circular 230, CPAs must promptly return client records upon written request, even when fees remain unpaid. However, the regulation distinguishes between different types of records. Client records specifically refer to documents that the client originally provided to the CPA - these belong to the client and must be returned regardless of any fee dispute. The underlying principle is that clients shouldn't lose access to their own source documents because of payment disagreements. Answer A is correct because source documents like W-2s and 1099s were provided by the client and must be returned promptly under Circular 230, notwithstanding the outstanding fees. Answer B is wrong because Circular 230 supersedes state law regarding client records - you cannot withhold client-provided documents even if state law might otherwise permit retention for unpaid fees. Answer C incorrectly includes the CPA's workpapers. While these were prepared for the client's benefit, they represent the CPA's own work product and analytical processes, which are not considered "client records" under Circular 230. Answer D incorrectly includes the draft tax return. Since this return was never completed or filed, it remains part of the CPA's work product rather than a client record that must be returned. Remember: Circular 230 requires return of what the client brought in, not what the CPA created during the engagement.

Question 11

Jamie is head of household in 2025 and earned 88,000ofwagesand88,000 of wages and 88,000ofwagesand3,000 of interest income. Jamie paid 5,500ofstateincometaxand5,500 of state income tax and 5,500ofstateincometaxand4,900 of real property taxes, and also paid $1,100 of local general sales tax; Jamie elects to deduct state income taxes rather than general sales taxes. What is the maximum SALT deduction Jamie may claim on Schedule A?

  1. $10,000, limited by the SALT cap (correct answer)
  2. $11,500, because both state income tax and general sales tax may be deducted together
  3. $5,000, because head of household has a reduced SALT cap
  4. $9,400, because only real property taxes are subject to the SALT cap

Explanation: This question addresses the SALT deduction for head of household filers who must choose between income and sales tax deductions. Jamie paid 10,400instateincomeandpropertytaxes(10,400 in state income and property taxes (10,400instateincomeandpropertytaxes(5,500 state income tax + 4,900realpropertytaxes)andelectedtodeductstateincometaxesratherthanthe4,900 real property taxes) and elected to deduct state income taxes rather than the 4,900realpropertytaxes)andelectedtodeductstateincometaxesratherthanthe1,100 of general sales taxes. The total eligible SALT is 10,400,butthedeductioniscappedat10,400, but the deduction is capped at 10,400,butthedeductioniscappedat10,000 for head of household filers. The correct answer is 10,000becauseheadofhouseholdfilershavethesame10,000 because head of household filers have the same 10,000becauseheadofhouseholdfilershavethesame10,000 SALT cap as single and married filing jointly taxpayers, and the cap applies to whichever combination of taxes the taxpayer elects to deduct. Answer B (11,500)incorrectlyallowsbothincomeandsalestaxestobedeductedtogether.AnswerC(11,500) incorrectly allows both income and sales taxes to be deducted together. Answer C (11,500)incorrectlyallowsbothincomeandsalestaxestobedeductedtogether.AnswerC(5,000) wrongly applies a reduced cap for head of household. Answer D (9,400)incorrectlysuggestsonlypropertytaxesaresubjecttothecap.Jamiemadetherightchoiceelectingincometaxesoversalestaxessincetheincometaxesarehigher,resultinginthemaximumallowableSALTdeductionof9,400) incorrectly suggests only property taxes are subject to the cap. Jamie made the right choice electing income taxes over sales taxes since the income taxes are higher, resulting in the maximum allowable SALT deduction of 9,400)incorrectlysuggestsonlypropertytaxesaresubjecttothecap.Jamiemadetherightchoiceelectingincometaxesoversalestaxessincetheincometaxesarehigher,resultinginthemaximumallowableSALTdeductionof10,000.

Question 12

Evan is single in 2025 and earned 65,000ofwagesand65,000 of wages and 65,000ofwagesand4,000 of taxable unemployment compensation. Evan paid 2,900ofstateincometaxand2,900 of state income tax and 2,900ofstateincometaxand1,600 of local income tax, and 4,800ofrealpropertytaxesonahome;Evanalsomade4,800 of real property taxes on a home; Evan also made 4,800ofrealpropertytaxesonahome;Evanalsomade600 of charitable contributions. What is Evan’s maximum SALT deduction on Schedule A?

  1. $9,300, equal to state income tax plus local income tax plus real property taxes (correct answer)
  2. 10,000,becausetheSALTcapappliesonlywhenincomeexceeds10,000, because the SALT cap applies only when income exceeds 10,000,becausetheSALTcapappliesonlywhenincomeexceeds100,000
  3. 5,000,becausetheSALTcapis5,000, because the SALT cap is 5,000,becausetheSALTcapis5,000 for single filers
  4. $7,700, because local income taxes are not deductible for federal purposes

Explanation: This question addresses the SALT deduction for a single taxpayer with income below 100,000.Evanpaid100,000. Evan paid 100,000.Evanpaid9,300 in state and local taxes (2,900stateincometax+2,900 state income tax + 2,900stateincometax+1,600 local income tax + 4,800realpropertytaxes),whichisbelowthe4,800 real property taxes), which is below the 4,800realpropertytaxes),whichisbelowthe10,000 cap for single filers. The correct answer is 9,300becausewhentotaleligibleSALTpaymentsarelessthanthecap,thetaxpayercandeductthefullamountpaid.AnswerB(9,300 because when total eligible SALT payments are less than the cap, the taxpayer can deduct the full amount paid. Answer B (9,300becausewhentotaleligibleSALTpaymentsarelessthanthecap,thetaxpayercandeductthefullamountpaid.AnswerB(10,000) incorrectly suggests the cap only applies to higher-income taxpayers, when in fact it applies to all taxpayers regardless of income level. Answer C (5,000)wronglystatesthesinglefilercapis5,000) wrongly states the single filer cap is 5,000)wronglystatesthesinglefilercapis5,000 rather than 10,000.AnswerD(10,000. Answer D (10,000.AnswerD(7,700) incorrectly excludes local income taxes, which are deductible under IRC Section 164. Since Evan's total SALT is below the cap, there's no benefit to timing strategies, but Evan should ensure itemized deductions exceed the standard deduction to make itemizing worthwhile.

Question 13

The child tax credit for 2024 is 2,000perqualifyingchild.Ataxpayerwith2,000 per qualifying child. A taxpayer with 2,000perqualifyingchild.Ataxpayerwith150,000 of modified adjusted gross income (MAGI) filing as married filing jointly will receive:

  1. The full 2,000creditperqualifyingchild,asthephase−outforMFJbeginsat2,000 credit per qualifying child, as the phase-out for MFJ begins at 2,000creditperqualifyingchild,asthephase−outforMFJbeginsat400,000 MAGI. (correct answer)
  2. A reduced credit, as the phase-out begins at $110,000 for MFJ.
  3. No credit, as the phase-out eliminates the credit above $150,000.
  4. A $1,000 credit per qualifying child due to partial phase-out.

Explanation: The child tax credit phase-out for MFJ begins at 400,000MAGI−a400,000 MAGI - a 400,000MAGI−a150,000 MAGI is well below this threshold, so the full 2,000creditperqualifyingchildisavailable.AnswerAiscorrect.The2,000 credit per qualifying child is available. Answer A is correct. The 2,000creditperqualifyingchildisavailable.AnswerAiscorrect.The110,000 phase-out (B) was the pre-TCJA rule. The credit is not eliminated at $150,000 for MFJ (C, D).

Question 14

In tax year 2023, Partner C (single) receives from a partnership a 500,000ordinarylossfromatradeorbusinessinwhichPartnerCmateriallyparticipates.PartnerCalsohas500,000 ordinary loss from a trade or business in which Partner C materially participates. Partner C also has 500,000ordinarylossfromatradeorbusinessinwhichPartnerCmateriallyparticipates.PartnerCalsohas300,000 of wage income. Assume basis and at-risk limitations do not apply. What impact does the loss limitation have on the partner's tax return?

  1. Partner C deducts the full $500,000 loss because excess business loss rules do not apply to partnership losses
  2. Partner C applies the excess business loss limitation; the disallowed portion is carried forward as a net operating loss (correct answer)
  3. Partner C must treat the partnership loss as a capital loss limited to $3,000 per year
  4. Partner C may carry the partnership loss back 2 years and recover prior-year wage withholding

Explanation: This question tests the excess business loss limitation for partnership losses allocated to individual partners. Partner C receives a 500,000ordinarybusinesslossandhas500,000 ordinary business loss and has 500,000ordinarybusinesslossandhas300,000 of wage income, triggering the excess business loss limitation for single taxpayers. The deductible loss is limited to the threshold amount (approximately $305,000 for 2023), with the excess carried forward as an NOL. Answer A incorrectly exempts partnership losses from the limitation, Answer C incorrectly recharacterizes ordinary losses as capital losses, and Answer D incorrectly allows loss carrybacks. The tax planning principle is that all business losses from pass-through entities are aggregated and subject to the excess business loss limitation at the partner level, regardless of entity type.

Question 15

Lena’s spouse died in 2024. Lena remained unmarried throughout 2025 and paid more than half the cost of maintaining a home for herself and her dependent child, who lived with her all year. Lena earned $120,000 in wages and is evaluating filing status options. Which filing status provides the best tax advantage for 2025?

  1. Single (because she is not married in 2025)
  2. Head of household (because it always provides lower tax than qualifying surviving spouse)
  3. Qualifying surviving spouse (qualifying widow(er) with dependent child) (correct answer)
  4. Married filing jointly (because joint filing is allowed for two years after death)

Explanation: The tax concept being tested is qualifying surviving spouse for high-income survivors with dependents. Lena's spouse died in 2024, she remained unmarried in 2025, maintaining a home for her dependent child. Qualifying surviving spouse aligns with IRS guidelines, offering joint rates and deductions for two years post-death, optimal for $120,000 income. Single is less favorable; head of household has smaller benefits; joint only for death year. Status provides marriage-like tax relief. Recommend based on income level and dependent eligibility.

Question 16

Natalie is single with AGI of 200,000andlivesinahigh−taxjurisdiction.Shepaid200,000 and lives in a high-tax jurisdiction. She paid 200,000andlivesinahigh−taxjurisdiction.Shepaid17,000 of state income taxes and 6,000ofrealpropertytaxes(SALTcappedat6,000 of real property taxes (SALT capped at 6,000ofrealpropertytaxes(SALTcappedat10,000), 12,000ofqualifiedhomemortgageinterest,12,000 of qualified home mortgage interest, 12,000ofqualifiedhomemortgageinterest,3,000 of cash charitable contributions, and 25,000ofunreimbursedmedicalexpenses(deductibleonlyabove25,000 of unreimbursed medical expenses (deductible only above 25,000ofunreimbursedmedicalexpenses(deductibleonlyabove,7.5%$ of AGI). What is the impact of the SALT deduction cap on Natalie’s return (i.e., by how much are her SALT payments reduced for itemized deduction purposes)?

  1. $0
  2. $13,000 (correct answer)
  3. $10,000
  4. $23,000

Explanation: This question specifically asks for the impact of the SALT cap, not total itemized deductions. The key fact is that Natalie paid 23,000intotalSALT(23,000 in total SALT (23,000intotalSALT(17,000 state income taxes + 6,000propertytaxes)butcanonlydeduct6,000 property taxes) but can only deduct 6,000propertytaxes)butcanonlydeduct10,000 due to the cap. The impact (reduction) of the SALT cap is 23,000−23,000 - 23,000−10,000 = 13,000.ChoiceBcorrectlyshows13,000. Choice B correctly shows 13,000.ChoiceBcorrectlyshows13,000 as the reduction amount, Choice A (0)incorrectlysuggestsnoimpact,ChoiceC(0) incorrectly suggests no impact, Choice C (0)incorrectlysuggestsnoimpact,ChoiceC(10,000) confuses the cap limit with the reduction, and Choice D ($23,000) shows the total SALT paid rather than the reduction. For tax planning, high-income single taxpayers should consider state tax planning strategies and may benefit from maximizing other deductions like charitable contributions or exploring business deduction opportunities.

Question 17

A taxpayer (single) has \175,000ofwages,of wages,ofwages,$1,900oftaxableinterest,of taxable interest,oftaxableinterest,$2,600ofqualifieddividends,andof qualified dividends, andofqualifieddividends,and$11,000oflong−termcapitalgains.ThetaxpayerexercisedISOswithaof long-term capital gains. The taxpayer exercised ISOs with aoflong−termcapitalgains.ThetaxpayerexercisedISOswitha$12,000$ spread at exercise and held the shares at year-end; no other AMT adjustments apply. Under AMT rules, how is the ISO spread treated?

  1. It is included in AMTI as an AMT adjustment in the year of exercise (correct answer)
  2. It is included in regular taxable income and therefore not an AMT adjustment
  3. It is excluded from both regular taxable income and AMTI until the stock is sold
  4. It reduces AMTI because ISO spread is a negative preference item

Explanation: The tax concept being tested is the treatment of ISO bargain elements in AMTI under IRC §56(b)(3). Key financial details feature a $12,000 ISO spread with shares held at year-end. The correct treatment includes the spread in AMTI as an adjustment in the exercise year. Choice B is incorrect as the spread is not in regular income until sale, requiring AMT adjustment; Choice C is wrong because it is included in AMTI at exercise, not deferred; Choice D is erroneous since it increases, not reduces, AMTI. To determine AMT exposure, add ISO spreads to taxable income for AMTI. Compute tentative AMT and compare to regular tax liability.

Question 18

Public Law 86-272 (P.L. 86-272) provides protection from state income tax when a business:

  1. Is incorporated in a state other than where it conducts business.
  2. Has less than $1 million in sales in a state.
  3. Limits its in-state activities to solicitation of orders for tangible personal property that are approved and shipped from outside the state. (correct answer)
  4. Has no employees physically present in the state.

Explanation: P.L. 86-272 protects companies from state income tax when their only in-state activity is soliciting orders for tangible personal property shipped from outside the state. Answer C is correct. Incorporation state (A) doesn't provide P.L. 86-272 protection. No dollar threshold exists (B). Employees may be present for solicitation (D).

Question 19

A nonresident alien with U.S.-source income is generally required to file:

  1. Form 1040, the same as U.S. citizens.
  2. No return if all tax was withheld at source.
  3. Form 1040-NR only if they have ECI (effectively connected income).
  4. Form 1040-NR to report both ECI (at graduated rates) and FDAP income (at 30% or applicable treaty rate) - even if tax was withheld, a return may be required to reconcile withholding and claim refunds. (correct answer)

Explanation: Nonresident aliens use Form 1040-NR to report U.S.-source income. A return may be required even with full withholding to reconcile and claim any refund. Answer D is correct. Form 1040 is for citizens and residents (A). A return may be required even with full withholding (B). Both ECI and FDAP may require a return (C).

Question 20

An individual taxpayer wants to make annual gifts in 2026 to five beneficiaries and is considering writing one check payable to a family trust rather than making separate gifts. The taxpayer wants the gifts to qualify for the 19,000annualgiftexclusionperdoneeandavoidusingthe19,000 annual gift exclusion per donee and avoid using the 19,000annualgiftexclusionperdoneeandavoidusingthe13,610,000 lifetime exemption (40% rate above it). What is the most tax-efficient way to utilize the annual gift exclusion?

  1. Make $19,000 gifts directly to each beneficiary (or ensure the trust provides each beneficiary a present-interest withdrawal right) so the gifts qualify for annual exclusions. (correct answer)
  2. Make a single $95,000 gift to the trust and claim five annual exclusions automatically, regardless of trust terms.
  3. Make a single $95,000 gift to the trust and claim an unlimited annual exclusion because trusts are disregarded for gift tax purposes.
  4. Make a single $95,000 gift to the trust and apply a 20% gift tax rate to avoid reducing the lifetime exemption.

Explanation: This question tests qualifying trust gifts for annual exclusions via present-interest requirements under IRC Section 2503(b) and Crummey powers. The key facts are five beneficiaries, a single trust check for 95,000,anddesiretoexcludewithoutexemptionuse.ChoiceAiscorrectbecausedirectgiftsorCrummeyrightsprovidepresentinterest,allowing95,000, and desire to exclude without exemption use. Choice A is correct because direct gifts or Crummey rights provide present interest, allowing 95,000,anddesiretoexcludewithoutexemptionuse.ChoiceAiscorrectbecausedirectgiftsorCrummeyrightsprovidepresentinterest,allowing19,000 exclusions per beneficiary. Choice B is incorrect without Crummey provisions; choice C is wrong as trusts are not disregarded. Choice D fails with rate at 40%. A decision rule is to include withdrawal rights in trusts for exclusions equal to beneficiaries times $19,000. Use direct gifts if simplicity is preferred over trust protections.

Question 21

The statute of limitations for assessment is unlimited (i.e., there is no limitations period) when:

  1. The taxpayer owes more than $100,000 in back taxes.
  2. The taxpayer files a false or fraudulent return with intent to evade tax, or fails to file a return at all. (correct answer)
  3. The taxpayer is a foreign national with U.S. source income.
  4. The taxpayer has foreign bank accounts that were not disclosed.

Explanation: The statute of limitations is unlimited for fraud (filing a false return with fraudulent intent) or for failure to file a return - the IRS may assess tax at any time. Answer B is correct. Tax amounts (A) don't affect the SOL. Foreign status (C) doesn't create an unlimited period. Foreign accounts (D) may extend reporting obligations but don't create unlimited assessment SOL.

Question 22

A sole proprietorship landscaping business hires a worker who must be on-site from 7:00 a.m. to 3:30 p.m., uses the business’s truck and equipment, is trained on the owner’s required procedures, and is paid $1,000 weekly. The owner is trying to decide payroll tax responsibilities for the worker (Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA), and State Unemployment Tax Act (SUTA)) and whether to issue a Form W-2 or Form 1099-NEC. What is the correct classification for this worker under Internal Revenue Service (IRS) common-law rules?

  1. Independent contractor; issue Form 1099-NEC and do not withhold or pay FICA, FUTA, or SUTA
  2. Employee; issue Form W-2 and withhold/pay applicable FICA and pay FUTA and SUTA as required (correct answer)
  3. Independent contractor; issue Form W-2 but do not pay FUTA or SUTA
  4. Employee; issue Form 1099-NEC and withhold only federal income tax

Explanation: This question tests the IRS common-law rules for classifying workers as employees or independent contractors, which determine payroll tax responsibilities under FICA, FUTA, and SUTA. The key facts are the required on-site hours, use of the business's truck and equipment, training on the owner's procedures, and weekly payment, all indicating significant behavioral and financial control by the employer. Choice B is correct because these factors classify the worker as an employee under IRS guidelines, requiring Form W-2 issuance and withholding/payment of FICA, FUTA, and SUTA taxes. Choice A is incorrect because the level of control does not support independent contractor status, which would use Form 1099-NEC without those taxes. Choice C is wrong as independent contractors do not receive Form W-2, and Choice D is incorrect because employees must receive Form W-2, not Form 1099-NEC, and all applicable taxes apply beyond just federal income tax. To classify workers, apply the IRS behavioral control, financial control, and relationship factors systematically. Document the analysis to support compliance and mitigate reclassification risks during audits.

Question 23

During 2024, Forge Corp., a calendar-year C corporation, made the following expenditures:

  • Business meals with clients where business was discussed: $$$8,000
  • Tickets to a local theater production for key clients: $$$3,000
  • Food and beverages for the annual employee holiday party: $$$5,000

What is the total amount of these expenses that Forge Corp. can deduct to determine its taxable income?

  1. $$$4,000
  2. $$$8,000
  3. $$$9,000 (correct answer)
  4. $$$10,500

Explanation: When you encounter business expense deduction questions, you need to understand that different types of business entertainment and meal expenses have varying deductibility limits under current tax law. Let's analyze each expense category. Business meals with clients where business was discussed are 50% deductible, so the $8,000\$8,000$8,000 expense yields a $4,000\$4,000$4,000 deduction. The theater tickets for clients are entertainment expenses, which are generally 0% deductible under the Tax Cuts and Jobs Act changes. The employee holiday party food and beverages qualify as a de minimis fringe benefit available to all employees, making the full $5,000\$5,000$5,000 deductible. Total deductible amount: $4,000+$0+$5,000=$9,000\$4,000 + \$0 + \$5,000 = \$9,000$4,000+$0+$5,000=$9,000, confirming answer C is correct. Answer A ($4,000\$4,000$4,000) incorrectly assumes only the business meals are deductible, overlooking that employee party expenses remain fully deductible. Answer B ($8,000\$8,000$8,000) mistakenly treats business meals as 100% deductible while ignoring the other expenses entirely. Answer D ($10,500\$10,500$10,500) applies the 50% limitation incorrectly to the combined total of business meals and entertainment ($11,000×50%=$5,500\$11,000 × 50\% = \$5,500$11,000×50%=$5,500), then adds the employee party costs, but this approach wrongly assumes entertainment expenses have partial deductibility. Remember this key distinction: client entertainment is non-deductible, business meals are 50% deductible, but employee-wide events like holiday parties remain fully deductible as they're considered employee benefits rather than client entertainment.

Question 24

A taxpayer in the 24% bracket purchased shares of Stock Z for 25,000andsellsthemfor25,000 and sells them for 25,000andsellsthemfor39,000 after holding them for 9 months. The taxpayer also received 2,500ofqualifieddividendsfromotherstocksand2,500 of qualified dividends from other stocks and 2,500ofqualifieddividendsfromotherstocksand4,000 of interest income from bonds during the year, and has a traditional IRA invested in mutual funds. What is the tax consequence of realizing a short-term capital gain in this scenario?

  1. The $14,000 gain is taxed as a short-term capital gain at ordinary income rates in the year of sale. (correct answer)
  2. The $14,000 gain is taxed at preferential long-term capital gain rates because the stock was held less than one year.
  3. The $14,000 gain is treated as qualified dividend income because Stock Z is a domestic corporation.
  4. The $14,000 gain is deferred until the taxpayer withdraws funds from the traditional IRA.

Explanation: The tax concept being tested is short-term capital gain taxation based on holding periods under IRC Section 1222. The key facts are the 9-month holding for Stock Z, resulting in a $14,000 short-term gain. Choice A is correct because short-term gains are ordinary income per IRC Section 1, aligning with planning to extend holdings for preferential rates. Choice B is incorrect as preferential rates require over one year; Choice C is wrong as gains are not dividends. Choice D is incorrect as IRA deferral does not apply to taxable sales. A transferable framework tracks holding to classify gains. Compare tax costs of short-term versus potential long-term treatment.

Question 25

A taxpayer expects to owe $800 in tax for the year after withholding and credits. Are estimated tax payments required?

  1. Yes - any expected tax liability requires estimated payments.
  2. Yes - 800exceedsthe800 exceeds the 800exceedsthe500 minimum threshold.
  3. No - the taxpayer's tax liability will be covered by standard withholding.
  4. No - the threshold for required estimated payments is 1,000;anexpectedliabilityof1,000; an expected liability of 1,000;anexpectedliabilityof800 does not require estimated payments. (correct answer)

Explanation: Estimated payments are required only when the expected tax owed after withholding is 1,000ormore.1,000 or more. 1,000ormore.800 is below this threshold, so no estimated payments are required. Answer D is correct. Any tax liability doesn't trigger requirements (A). 500isthecorporatethreshold(B).Theno−paymentconclusion(C)iscorrectbutthereasonshouldbethe500 is the corporate threshold (B). The no-payment conclusion (C) is correct but the reason should be the 500isthecorporatethreshold(B).Theno−paymentconclusion(C)iscorrectbutthereasonshouldbethe1,000 threshold.